Tribunal Partially Allows Assessee Appeal, Directs Re-Adjudication

The tribunal partly allowed the assessee's appeal, directing fresh adjudication on the advertisement and business promotion expenses issue. The tribunal upheld the assessee's contentions on transfer pricing adjustments, software expenditure, disallowance of club expenses, and directed the Assessing Officer to re-compute income for the levy of interest under section 234B. The order was pronounced on 19th July 2013.

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Issues Involved:
1. Transfer pricing adjustment on account of purchase of raw materials.
2. Adjustment on account of advertisement and business promotion expenses.
3. Disallowance of software expenditure.
4. Disallowance of club expenses.
5. Levy of interest under section 234B.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Account of Purchase of Raw Materials:

The assessee challenged the final draft assessment order dated 31st October 2011, which included transfer pricing adjustments made by the Transfer Pricing Officer (TPO) for Rs. 1.56 crores on the purchase of raw materials. The TPO rejected the internal Transactional Net Margin Method (TNMM) adopted by the assessee and instead used 15 external comparables to benchmark the average arithmetic mean of 0.96% against the assessee's operating margins. The TPO's rejection was based on the significant advertisement and promotion expenses incurred by the assessee. The tribunal upheld the assessee's contention that internal comparables should be given priority, citing the Third Member decision in Teconimont ICB Pvt. Ltd. The tribunal concluded that the internal TNMM should be accepted as the assessee's segmental results were more appropriate for determining the arm's length price (ALP).

2. Adjustment on Account of Advertisement and Business Promotion Expenses:

The TPO observed that the assessee incurred substantial advertisement and business promotion expenses amounting to Rs. 94.95 crores, which was 58.75% of the total turnover. The TPO concluded that these expenses primarily benefited the Associated Enterprises (A.E.) and made an adjustment of Rs. 64.81 crores. The Dispute Resolution Panel (DRP) partially modified this adjustment. The tribunal remanded the issue back to the TPO for fresh adjudication in light of the Special Bench decision in L.G. Electronics India Pvt. Ltd., directing the TPO to consider the income from contract bottling units, exclude sales-related expenditure, apply the Comparable Uncontrolled Price (CUP) method, and consider the absence of mark-up in the adjustment.

3. Disallowance of Software Expenditure:

The assessee challenged the disallowance of software expenditure of Rs. 34,630. Both parties agreed that this issue had been decided in favor of the assessee in the previous assessment year (2006-07). The tribunal followed the earlier decision, treating the software expenditure as revenue expenditure and allowing the ground.

4. Disallowance of Club Expenses:

The assessee also challenged the disallowance of club expenses of Rs. 63,325. The tribunal noted that this issue was covered in favor of the assessee by the decision in the previous assessment year (2006-07) and the judgment of the Hon'ble Jurisdictional High Court in CIT v. Raychem RPG Ltd. Consequently, the tribunal allowed the ground.

5. Levy of Interest Under Section 234B:

The assessee contended that the levy of interest under section 234B was consequential in nature. The tribunal directed the Assessing Officer (A.O.) to give consequential effect in accordance with the law while re-computing the income.

Conclusion:

The tribunal partly allowed the assessee's appeal for statistical purposes, directing fresh adjudication on the advertisement and business promotion expenses issue and upholding the assessee's contentions on other grounds. The order was pronounced in the open court on 19th July 2013.

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